Republic Bancorp, Inc.’s Third Quarter Net Income from Continuing Operations Increases 7%

LOUISVILLE, Ky.--(BUSINESS WIRE)-- Republic Bancorp, Inc. (NASDAQ: RBCAA), headquartered in Louisville, Kentucky, is the holding company of Republic Bank & Trust Company (the “Bank”).

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Republic Bancorp, Inc. (“Republic” or the “Company”) is pleased to report third quarter net income from continuing operations of $17.5 million, a 7% increase over the third quarter of 2018, resulting in Diluted Earnings per Class A Common Share (“Diluted EPS”) from continuing operations of $0.83. Year-to-date net income from continuing operations was $63.0 million, which is a 10% increase from the same period in 2018. The Company’s return on average assets (“ROA”) and return on average equity (“ROE”) was 1.58% and 12.11% for the first nine months of 2019.

Steve Trager, Chairman & CEO of Republic commented, “With $2.8 million of primarily nonrecurring tax benefits recorded during the third quarter of 2018 reducing comparability of our quarterly and year-to-date net income metrics, we have benchmarked our 2019 results using pre-tax net income. In addition, the July 2019 sale announcement by the Company of four banking centers created a discontinued operations reporting requirement for these units. As a result, we view our pre-tax net income from continuing operations to be more reflective of our true operating performance for the third quarters and nine months ended September 30, 2019 and 2018.

“As it relates to our pre-tax net income from continuing operations, we are excited about these results. Overall pre-tax net income from continuing operations increased to $21.7 million for the third quarter of 2019, an increase of 20% over the third quarter of 2018. Healthy growth in net interest income, a strong increase in mortgage banking income, and a positive reduction in provision for loan losses within the Republic Processing Group drove the overall results for the quarter,” concluded Steve Trager.

The following table highlights Republic’s financial performance for the third quarters and nine months ended September 30, 2019 and 2018:

Results of Operations for the Third Quarter of 2019 Compared to the Third Quarter of 2018

The following tables present segment-level pre-tax and after-tax net income results for the third quarters and nine months ended September 30, 2019 and 2018:

Core Bank(1) – While third quarter 2019 Core Bank net income from continuing operations declined by 3% from the third quarter of 2018 due primarily to the previously mentioned tax benefits recorded during the third quarter of 2018, Core Bank pre-tax net income from continuing operations increased a solid 5% over the third quarter of 2018. Benefits from continued growth in net interest income and strong mortgage banking income, partially offset by increases in provision for loan losses (“Provision”) and noninterest expense, drove the overall increase in pre-tax net income from continuing operations.

Driven by 12% growth in average loan balances, Core Bank net interest income from continuing operations grew $2.2 million, or 5%, for the third quarter of 2019. The benefit to net interest income resulting from the strong loan growth was partially offset by compression within the Core Bank’s net interest margin.

The following tables present the overall changes in the Core Bank’s net interest income, net interest margin, as well as average and period-end loan balances by reportable segment:

The primary drivers of the changes in the Core Bank’s net interest income from continuing operations for the third quarter of 2019, as compared to the third quarter of 2018, were as follows:

Traditional Banking

Driven by growth in average loan balances of $245 million, or 7%, partially offset by net interest margin compression of six basis points, net interest income from continuing operations at the Traditional Banking segment increased $2.3 million, or 6%, over the third quarter of 2018. The primary contributors for the increase in the quarter-over-quarter average loan balances were commercial real estate loans, which grew $94 million, and commercial and industrial loans, which grew $83 million.

The quarter-over-quarter margin compression within the Traditional Banking segment primarily reflected the negative impact of the flat, and in some instances, inverted U.S. Treasury yield curve during 2019 in which short-term and long-term U.S. Treasury yields remained similar to each other. As is generally the case with all banks, the Traditional Bank’s asset yields and liability funding costs are substantially determined by the shape of the U.S. Treasury yield curve. As a result, the flat or inverted yield curve continued to place market-based pressure on the Traditional Bank during the quarter thus raising the overall cost of its funding liabilities, which are generally tied to short-term market rates. Concurrently, the Traditional Bank also continued to experience market-based pressures during the quarter to reduce its new loan yields, which are generally tied to longer-term rates. Management expects margin compression challenges to remain in the future as long as the overall U.S. Treasury yield curve remains flat or inverted.

Warehouse Lending

Despite a significant increase in average outstanding Warehouse Lending balances during the third quarter of 2019 compared to the third quarter of 2018, on-going margin compression in the Warehouse segment’s net interest margin during the same period drove an $85,000 decrease in its net interest income. The following factors led to the overall changes in the Warehouse segment’s net interest income and net interest margin:

• Pricing pressure to the Bank on Warehouse lines of credit resulting from the negative impact of an inverted yield curve to the Bank’s Warehouse clients primarily drove the 96-basis-point compression in the Warehouse segment’s net interest margin.

• A sharp decline in long-term fixed mortgage rates increased Warehouse clients’ usage of their Bank lines of credit, driving average outstanding Warehouse balances from $542 million during the third quarter of 2018 to $752 million during the third quarter of 2019.

• Through the Company’s internal funds-transfer-pricing (“FTP) process, the Traditional Banking segment charges or credits other segments based on prevailing market rates for funds utilized by loans or provided by deposits. Through this FTP process, the Warehouse segment experienced an approximate $300,000 decrease in FTP income credit during the quarter as a result of a $52 million decline in average noninterest-bearing deposit balances within the segment. Substantially all of the decline in average noninterest-bearing balances was related to one large escrow account that exited the Bank in the fourth quarter of 2018.

The Core Bank’s Provision increased to $2.0 million for the third quarter of 2019 from $474,000 for the same period in 2018. The difference in the Provision between the two periods primarily reflected the partial charge-off of one large commercial-related loan that defaulted during the third quarter of 2019.

The table below presents the Core Bank’s credit quality metrics:

Core Bank noninterest income from continuing operations was $10.7 million during the third quarter of 2019, a $1.9 million, or 21%, increase from the $8.9 million achieved during the third quarter of 2018. Driving the increase in noninterest income was a $1.7 million rise in mortgage banking income, which resulted from a $75 million increase in secondary market loans originated from period to period combined with a $40 million increase in the Bank’s pipeline of secondary market loans in process from September 30, 2018 to September 30, 2019. A sharp decline in long-term mortgage rates during the previous nine months, combined with the Bank’s continued investments in mortgage resources, contributed to the increased quarter-over-quarter mortgage activity.

Core Bank noninterest expense from continuing operations increased $1.8 million, or 5%, during the third quarter of 2019 compared to the third quarter of 2018 resulting primarily from a $1.3 million, or 7%, increase in salaries and benefits expense. Annual merit increases, as well as, the addition of 60 Core Bank full-time-equivalent employees (“FTEs”) from September 30, 2018 to September 30, 2019 primarily drove the increase.

The Core Bank’s noninterest expense during the third quarter of 2019 was positively impacted by a $349,000 reduction in FDIC insurance costs. Because the FDIC’s Deposit Insurance Fund (“DIF”) exceeded a reserve ratio of 1.38% by June 30, 2019, the Bank was able to apply its Small Bank Assessment Credits against its most recent FDIC insurance premium payment.

Republic Processing Group(3)

The Republic Processing Group (“RPG”) reported pre-tax net income from continuing operations of $4.7 million for the third quarter of 2019 compared to $1.9 million for the same period in 2018. The positive increase in pre-tax net income at RPG for the quarter can be further segmented by a $1.9 million increase in pre-tax net income from continuing operations for Republic Credit Solutions (“RCS”), and a $970,000 positive swing in pre-tax net loss from continuing operations for Tax Refund Solutions (“TRS”).

RCS’s increase in pre-tax net income from continuing operations was primarily driven by a $1.6 million reduction in Provision expense resulting from lower Provisions of $1.2 million and $459,000 for RCS’s line-of-credit product and its discontinued credit card product, respectively. The overall improvement in the Provision for the line-of-credit product was driven by a decline in its annualized historical loss rate combined with a year-to-year decrease in average outstanding balances. The decrease in losses within the RCS credit-card portfolio was due to the discontinuance of the program, effective January 2019.

Within TRS, a positive change in Provision expense from a net credit of $1.0 million during the third quarter of 2018 to a net credit of $2.0 million during the third quarter of 2019 drove the segment’s overall positive swing in net income. These credits to the Provision primarily reflected recoveries on Easy Advance (“EA”) loans charged off during the first half of the year. While TRS experienced a higher rate of EAs charged-off from January 1, 2019 to June 30, 2019 than the comparable six months in 2018, it also experienced a higher rate of EA recoveries during the third quarter of 2019 than during the third quarter of 2018.

With the third quarter EA paydowns, the percent of unpaid EAs to total EAs originated was 2.91% at September 30, 2019. This compares to 2.64% at September 30, 2018, a difference of 27 basis points. By comparison, the unpaid EA percentage was 5.84% at March 31, 2019, compared to 4.49% at March 31, 2018, representing a difference of 135 basis points. With all unpaid EAs having been charged off as of June 30, 2019, any EA payments received during the fourth quarter of 2019 will continue to represent recovery credits directly to income.

Discontinued Operations – Agreement to Sell Four Banking Centers(4)

In July 2019, the Bank entered into a definitive agreement to sell its four banking centers located in the Kentucky cities of Owensboro, Elizabethtown and Frankfort to Limestone Bank (“Limestone”), a subsidiary of Limestone Bancorp, Inc. The agreement provides that Limestone will acquire loans, with balances of approximately $131 million as of September 30, 2019, and assume deposits with balances of approximately $142 million as of the same date, associated with the four banking centers. The $131 million of loan balances to be sold include approximately $20 million of additional loans, primarily mortgage-related, that Republic and Limestone have further agreed to include in the transaction since the date of the original announcement and have been reduced by approximately $965,000 of credit card balances that Republic and Limestone have agreed to remove from the transaction.

In addition to the sale of loans and assumption of deposits, Limestone will also acquire substantially all of the fixed assets of these locations, which had a book value of $1.3 million as of September 30, 2019. Based on the September 30, 2019 deposits, the all-in blended premium for the transaction is expected to be near 6% of the total deposits transferred. The final calculated premium will be primarily based on the trailing 10-day average amount of the deposits as of the closing date, as well as the branch location for the deposits. The transaction is subject to customary closing conditions and is anticipated to be completed in the fourth quarter of 2019.

Total Company Income Taxes

The comparability of the Company’s performance metrics for the third quarters and nine months ending September 30, 2019 and 2018 was impacted by additional federal income tax benefits of approximately $2.8 million recorded during the third quarter of 2018 as part of Company’s preparation of its fiscal-year 2017 federal tax return. Approximately $2.6 million of those benefits was considered nonrecurring. The specifics of these federal income tax benefits are outlined in the following two paragraphs.

During the third quarter of 2018, the Company completed two separate studies and a tax-accounting-method change that positively impacted income taxes for its 2017 federal tax return and amended filings dating back to fiscal year 2014. As it relates to the two separate studies, the Company recorded benefits for both a fixed asset cost-segregation study and a Research and Development (“R&D”) tax-credit study. The R&D tax-credit study resulted in the recognition of R&D credits dating back to 2014. Due to the innovative nature of its business operations, the Company is optimistic that it will continue to qualify for a portion of these federal tax credits annually into the future. The Company also recorded a nonrecurring tax benefit as a result of a cost-segregation study that assigned revised tax lives to select fixed assets based on a detailed engineering-based analysis. The more detailed classification of fixed assets allowed the Company a large one-time recognition of additional depreciation expense for its 2017 federal tax return at a 35% income tax rate, as opposed to the Tax Cuts and Jobs Act rate of 21% it previously expected to receive for these deductions in the future.

In addition to the two studies, the Company also filed for an automatic change in accounting method in combination with its 2017 federal tax return related to the immediate recognition of loan origination costs for income tax purposes, as opposed to the amortization of those costs over the life of the loan. The Company estimates that the $2.8 million benefit of all three of these distinct tax-related items also increased its third quarter 2018 Diluted EPS by $0.13, ROA by 22 basis points, and ROE by 168 basis points.

Republic Bancorp, Inc. (the “Company”) is the parent company of Republic Bank & Trust Company (the “Bank”). The Bank currently has 45 full-service banking centers and two loan production offices throughout five states: 32 banking centers in 11 Kentucky communities - Covington, Crestview Hills, Elizabethtown, Florence, Frankfort, Georgetown, Lexington, Louisville, Owensboro, Shelbyville, and Shepherdsville; three banking centers in southern Indiana – Floyds Knobs, Jeffersonville, and New Albany; seven banking centers in six Florida communities (Tampa MSA) – Largo, Port Richey, St. Petersburg, Seminole, Tampa, and Temple Terrace and one loan production office in Oldsmar; two banking centers in Tennessee (Nashville MSA) – Cool Springs (Franklin) and Green Hills (Nashville), and one loan production office in Brentwood; and one banking center in Norwood (Cincinnati), Ohio. The Bank offers internet banking at www.republicbank.com. The Bank also offers separately branded, nation-wide digital banking at www.mymemorybank.com. The Company has $6.1 billion in assets and is headquartered in Louisville, Kentucky. The Company’s Class A Common Stock is listed under the symbol “RBCAA” on the NASDAQ Global Select Market.

Republic Bank. It’s just easier here. ®

Forward-Looking Statements

This press release contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The forward-looking statements in the preceding paragraphs are based on our current expectations and assumptions regarding our business, the future impact to our balance sheet and income statement resulting from changes in interest rates, the yield curve, the ability to develop products and strategies in order to meet the Company’s long-term strategic goals, the ability to recover previously charged-off Easy Advances, the economy, and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our actual results may differ materially from those contemplated by forward-looking statements. We caution you therefore against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Actual results could differ materially based upon factors disclosed from time to time in the Company’s filings with the U.S. Securities and Exchange Commission, including those factors set forth as “Risk Factors” in the Company’s Annual Report on Form 10-K for the period ended December 31, 2018 and Quarterly Report on Form 10-Q for the period ended June 30, 2019. The Company undertakes no obligation to update any forward-looking statements. These forward-looking statements are made only as of the date of this release, and the Company undertakes no obligation to release revisions to these forward-looking statements to reflect events or conditions after the date of this release.

Republic Bancorp, Inc. Financial Information Third Quarter 2019 Earnings Release (all amounts other than per share amounts, number of employees, and number of banking centers are expressed in thousands unless otherwise noted)

Republic Bancorp, Inc. Financial Information Third Quarter 2019 Earnings Release (continued) (all amounts other than per share amounts, number of employees, and number of banking centers are expressed in thousands unless otherwise noted)

Republic Bancorp, Inc. Financial Information Third Quarter 2019 Earnings Release (continued) (all amounts other than per share amounts, number of employees, and number of banking centers are expressed in thousands unless otherwise noted)

Republic Bancorp, Inc. Financial Information Third Quarter 2019 Earnings Release (continued) (all amounts other than per share amounts, number of employees, and number of banking centers are expressed in thousands unless otherwise noted)

Republic Bancorp, Inc. Financial Information Third Quarter 2019 Earnings Release (continued) (all amounts other than per share amounts, number of employees, and number of banking centers are expressed in thousands unless otherwise noted)

Republic Bancorp, Inc. Financial Information Third Quarter 2019 Earnings Release (continued) (all amounts other than per share amounts, number of employees, and number of banking centers are expressed in thousands unless otherwise noted)

Republic Bancorp, Inc. Financial Information Third Quarter 2019 Earnings Release (continued) (all amounts other than per share amounts, number of employees, and number of banking centers are expressed in thousands unless otherwise noted)

Republic Bancorp, Inc. Financial Information Third Quarter 2019 Earnings Release (continued) (all amounts other than per share amounts, number of employees, and number of banking centers are expressed in thousands unless otherwise noted)

Republic Bancorp, Inc. Financial Information Third Quarter 2019 Earnings Release (continued) Segment Data:

Reportable segments are determined by the type of products and services offered and the level of information provided to the chief operating decision maker, who uses such information to review performance of various components of the business (such as banking centers and business units), which are then aggregated if operating performance, products/services, and clients are similar.

As of September 30, 2019, the Company was divided into five reportable segments: Traditional Banking, Warehouse Lending (“Warehouse”), Mortgage Banking, Tax Refund Solutions (“TRS”), and Republic Credit Solutions (“RCS”). Management considers the first three segments to collectively constitute “Core Bank” or “Core Banking” operations, while the last two segments collectively constitute Republic Processing Group (“RPG”) operations. The Bank’s Correspondent Lending channel and the Company’s national branchless banking platform, MemoryBank®, are considered part of the Traditional Banking segment.

The nature of segment operations and the primary drivers of net revenues by reportable segment are provided below:

The accounting policies used for Republic’s reportable segments are the same as those described in the summary of significant accounting policies in the Company’s 2018 Annual Report on Form 10-K. Republic evaluates segment performance using operating income. The Company allocates goodwill to the Traditional Banking segment. Republic generally allocates income taxes based on income before income tax expense unless reasonable and specific segment allocations can be made. The Company makes transactions among reportable segments at carrying value.

Republic Bancorp, Inc. Financial Information Third Quarter 2019 Earnings Release (continued) Segment information for the quarters and nine months ended September 30, 2019 and 2018 follows:

Republic Bancorp, Inc. Financial Information Third Quarter 2019 Earnings Release (continued)

Republic Bancorp, Inc. Financial Information Third Quarter 2019 Earnings Release (continued)

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Republic Bancorp, Inc.  Kevin Sipes  Executive Vice President & Chief Financial Officer  (502) 560-8628

Source: Republic Bancorp, Inc.